Johann Els, Chief Economist at Old Mutual Group

Inflation and interest rates: June headline CPI lifted from 2.8% in May to 3%, while core CPI slipped from 3% to 2.9%. Inflationary pressure outside of food prices remain very subdued. While inflation will trend upwards toward 4% by the end of the year – largely due to easing base effects, the updrift will be very moderate and not indicative of any undue price pressures. Average 2025 inflation is expected at 3.3% (from 4.4% in 2024). I expect a slightly higher 4.2% average in 2025, before another downcycle should produce average inflation of 3.5% in 2027, and 3% in 2028.

My view on the MPC outcome this Thursday: I expect the SARB to cut rates by a final 25bps at its 31 July MPC meeting, though the tone is likely to be less dovish than in May. Thereafter, interest rates are likely to remain on hold for an extended period, particularly as I expect a new, lower inflation target of 3% to be announced later this year. Interest rates will likely resume a mild downcycle from mid-2027 as inflation moves lower towards the ‘new’ 3% target.

Reasons to cut:

• Very low y-o-y inflation
• Headline 3.0%, core 2.9%
• Weighted average consumer goods* 1.0%
• Even lower underlying momentum**
• Core 2.3%
• Weighted average consumer goods* -0.1%
• Lower inflation expectations
• Union expectations 1 year out down from 6.2% in Q2 2023 to 4.3% in Q2 2025.
• Q3 survey will likely show further moderation
• Rand stability
• R/$ now 17.70 vs 17.94 before May MPC meeting
• Despite tariff risk, rand has not weakened as SARB expected.

Reasons to keep rates unchanged:

• Expected updrift in inflation
• From current levels to 4% by Dec 2025
• From 3.3% Average in 2025, to 4.2% average in 2026
• BUT this is a very mild updrift only due to fading favourable base effects
• Risks around trade tariff uncertainty
• BUT rand has not reflected these risks, forecasts were already adjusted in April, and negotiations might lead to a sub-30% tariff on exports to the USA.
• Lower inflation target on the horizon
• This should not prevent a rate cut in July.
• Rather, rates will likely move sideways from here until 2027

Budget process reform: The National Treasury last week announced reforms to improve the budget process through earlier and broader stakeholder consultation, greater transparency, and enhanced oversight of spending. The reforms aim to boost fiscal efficiency, support departmental savings, and introduce a fiscal anchor, all as part of efforts to contain rising debt levels. These reforms have already been approved by Cabinet, meaning total agreement within the GNU.

My view: Treasury managed to get strict spending control in this policy document. No longer will programs be allowed to continue unchecked, nor will a simple inflationary increase be allowed. This is a significant step in expenditure control going forward.

Economic growth: South Africa’s composite leading business cycle indicator declined by 1.3% in May 2025, with nine out of ten components deteriorating. Major drags included a drop in residential building plans and weaker manufacturing orders. The only positive contribution came from higher US dollar export commodity prices. The recent rollover in the indicator—alongside downward revisions—is concerning, as it points to softer conditions ahead.

Nonetheless, easing structural constraints, low inflation, and falling interest rates should continue to support consumer spending. While overall momentum remains subdued, I expect a modest improvement in GDP growth this year: 1.3% in 2025 compared to 0.5% in 2024.

ENDS